EHang Holdings Ltd (EH) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, and welcome to the EHang Third Quarter 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn the call over to Anne Ji. Senior Director of Investor Relations, BT, please proceed.

Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the third quarter of 2022. The earnings release is available on the company's IR website. Please note, the conference call is being recorded, and the audio replay will be posted on the company's IR website. Today, the EHang management team, which include Mr. Huazhi Hu, Chief Executive Officer; and Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer, we will successfully give prepared remarks. Remarks delivered in Chinese will be followed by English translation. All translation is for convenience purpose only.

In case of any discrepancy, the management team's statement in our regional language will prevail. A Q&A session will follow afterwards. Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC.

The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the third quarter of 2022, unless stated otherwise. With that, now let me turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Huazhu.

[Interpreted] This is the English translation of the CEO's remarks. Hello, everyone. Thank you for joining our earnings conference call today. Since EHang submitted the EH 216 certification application to the CAAC, which is the Civil Aviation Administration of China at the end of 2020. We have been continuously committed to the efforts to actively promote the EHang 216 certification progress in the past two years. In their (inaudible) certification is not only a safety certification and a prerequisite for our facial commercial aircraft operations but also, the crucial path for EHang to move forward in this strategy of becoming an urban mobility platform operator. And that's the key catalyst and the driving force for the company's business growth.

Here, we would like to thank our investors, customers, regulators and partners for their long-lasting attention and support. Every member of the EHang team value the support given to eHealth and are wholly dedicated to meet expectations of our stakeholders. As an innovative project, the (inaudible) certification process is full of tremendous challenges, along with the continued impact of the pandemic in China. Our technology, product and the certification teams have tirelessly worked day and night. To overcome difficulties in a collaborative synergy. Additionally, they have worked to enter close cooperation with the CAAC expert team, and we are about to greet the victory dining. At present, all of our certification and has been officially approved by the CAAC expert team. In other words, the means of compliance for all the 12 specified air witness review subjects have been confirmed.

Including aircraft performance and flights, structural strength, design and configuration, ground control station, airborne human computer interaction continued awareness, et cetera. As a result, the Hana certification process has already completed the phases of concept design, requirements definition and compliance planning and entered the ongoing final phase for demonstration and verification of compliance. We have completed the most demanding and complicated work across the most difficult obstacles and overcame many challenging uncertainties. What we are doing next is to implement other plans that we made.

Besides, we are fully confident in the final phase of EHang’s certification, which is specifically about conducting modification review through the laboratory tests, ground tests and inspections, flight test and data analysis by the CAAC expert team and EHang in accordance with the approved certification plans. EHang 216 have accumulated more than 30,000 trial flights and data records over the years, which could be solid support to the demonstration of compliance. The proven passenger carrying AAV test by record as well as the test line in extreme weather environment, such as the high altitudes, typhoons, desserts and heavy fog will accelerate the process of verification of compliance.

On this basis, we are carrying out some supplementary test and flight test for verification, so as to complete the type certification process. We are fully confident to complete the world's first air witness certification for the human carrying and aircraft system. Our confidence is not only derived from strength and the innovation of our AAV technologies but also from the open and innovative spirit of the Chinese government, the CAAC and the aviation industry as well as their interest, support and guidance. All of these empowered a high degree of innovation, breadth, deeps and speed of the EHang 216 certification project, which are at the forefront of the emerging industries across the globe.

In September and November this year, EHang was honored to be invited by the ICAO, which is the International Civil Aviation Organization to attend the 41st ICAO assembly, Innovation Fair and RPAS Symposia at ICAO’s headquarter in Montreal, Canada sharing the exploration and practice on EHang 216 S-type certification project and innovative results with global aviation regulators. In particular, the CAAC as the first-class member of ICAO introduced China's first Air witness certification standard for human carrying unmanned aircraft system at ICAO’s Assembly providing a reference for countries in formulating related regulations.

It is not easy to be a first mover and a pioneer. Even so over the past eight years, EHang has always been committed to its steadfast mission, which is to make safe, autonomous and eco-friendly and mobility accessible to everyone. So this, we have and always will adhere to the principles of safety first, boating innovation, careful analysis and prudent verification contribute to the formulation of relevant industry standards and norms with the experience and the expertise we have accumulated over the years and lead healthy and continuously improving development of the emerging emit industry worldwide.

Meanwhile, driven by leading innovative pies like EHang, we are pleased to see that China has taken more and more new policies and measures to continuously support and promote the development of urban and mobility and Unmanned aviation. In August, the CAAC released the Unmanned Civilization development road map, 1.0, which set the short, medium and long-term development status and goals for 2025, 2030 and 2035. These are significant in how they clarify the direction for the new industry development.

Meanwhile, the CAAC also approved the seven new AAV civil aviation experimental zones in addition to the first batch of 13. Currently, there were a total of 20 pilot cities in China to put the policies into actions. In some of these zones, EHang received a strong sports and preorders from the local government and customers. They are actively building UAM operational trial basis and supporting infrastructures to bring the integrated development of (inaudible), aero logistics and smart city management industries as well as provide further grounds for the operations and the practical applications of EHang AAV.

Unlike other developing industries, we need to create new regulations to build up this new industry, and we made it, which expect to be followed by explosive growth. Against such a strong and promising backdrop, we have the reasons and confidence that EHang will achieve significant growth results and meet our strategic goals after completing the certification to provide better returns for our shareholders and partners while continuously promoting the sustainable development of the emerging UAM industry. Next, I will turn the call to our Chief Operating Officer, Mr. Xin Fang for business results in Q3. Thank you.

[Interpreted] This is the English translation of the CEO's remarks. Thank you, Mr. Huazhi. Hello, everyone. In the third quarter, we remained focused on EHang 216 (inaudible) certification project and continued to explore domestic and overseas markets to fully prepare for poster certification commercial operations. Since October, the COVID-19 results has scrapped across many cities across China, especially Guangzhou, where EHang is headquartered. Although we are facing serious challenges from pandemic control measures, we will continue to drive our efforts in a low altitude aero tourism on our AAV target markets. Following Guigang City in Guangxi Province and the disality in Jianshui City Yunnan province. Since the third quarter, we have been exploring more potential opportunities in Qingdao City, in Shandong province and Huangshan in Anhui Province.

And integrating local resources to actively develop a broader and diversified UEM ecosystem. EHang formally launched the 100 air mobility routes initiative last year. So far, we have completed over 6,800 operational trial flights with the EHang 216 in practical aerial scenarios at 15 operations spots across China to accumulate valuable experience for post certification commercial operations. These operations spots cover first-tier cities, such as Guangzhou, Shenzhen and Shanghai as well as other tourist destinations. In addition, EHang's self-developed AAV operational system has been put into use across all operations spots. The current internal test demonstrated positive results, which will significantly improve AAV operations management efficiency.

In October, we established a partnership with HAECO Group, a subsidiary of Swire Group. HAECO Group brings over 70 years of experience in maintenance, repair and overhaul. And as after-sales maintenance service system and network across the globe, we believe that the potential cooperation opportunities in manufacturing and assembly, continued air worseness, digital platforms, aircraft maintenance and talent training will help further solidify the foundation for EHang 216 commercial operations in the future. On the international front, we have made meaningful progress in two key regions, Asia and Europe. Since the beginning of this year, we have achieved a fruitful result in developing Asian markets, including Japan, Malaysia, Indonesia and Thailand and have received a total of 210 pre-orders for passenger-grade AAVs.

In the third quarter, with the support of our Japanese customers, EHang 216 completed a demo flight tour across four cities, leaving footprint in up to six Japanese cities to date. This flight tour not only demonstrated use cases in arising over the sea, air mobility and smart logistics, but also include the over the sea flight and point-to-point flight for the first time of an EBIT aircraft in Japan. It was also an excellent showcase for participation opportunities at Expo 2025 Osaka, Kansai which will further strengthen preparations for subsequent business expansion in Japan. Furthermore, I have played an important role in many European Union's UAM projects.

For instance, the EHang 216 12 flights in October verified and validated the UAM concept of operations, which completed the AMU-LED project objectives. In November, EHang participate the SAMVA project initiated by the European Union agency for the space program to deploy the EGNOS, which is the European Geostationary Navigation Overlay Service on the EHang 216 operations and to support use-based integration across Europe.

2022 is coming to an end, but we continue to see impact from the COVID-19 resurgence and pandemic control measures in China, which brings considerable challenges to our original air (inaudible) certification process and business development plan. We have adjusted our guidance based on the current situation and the outlook for the fourth quarter. The company expects total revenue for 2022 to be in the range of 55 million to RMB 65 million.

Nevertheless, we remain optimistic and confident about achieving the company's long-term financial growth and the development momentum based on our core competencies, including the leading technological advantages, the EHang 216 HTC process entering the final phase. And increasing UAM market demand with preorders for more than 1,200 passenger-grade AAVs in hand and sufficient preparation for commercialization and industrial chain deployment and also valuable regulatory support, especially in China. Based on that and our consistent execution of the corporate strategies, EHang is well positioned for a promising future. I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead. Thank you.

Thank you, Xin. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the third quarter of 2022, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here. Our third quarter performance reflects impact from the Core resurgence in China. However, we continue to enhance our cost management to improve operational efficiency despite these near-term challenges.

We maintain our focus on the development of areas that can deliver long-term growth as we continue to execute our strategy towards becoming an integrated urban air mobility operator. Turning to our operating results in Q3 2022. Total revenues were 8.2 million compared with 14.6 million in Q2. This was due to the unfavorable market impact mainly from the pandemic resurgence and related control measures in China. The EH216 AAV deliveries in Q3 were four units compared with eight units in Q2.

That said, demand for AAVs remains strong, notably with preorders from the Southeast Asian market this year as we are focusing on completing the final phase in the type certification process of H2 16x. We are also stepping up our efforts in preparing for its commercial operations by expanding our market presence and our partnership network at home and abroad, coupled with other strategic initiatives. Gross margin was 65.9% in Q3, a slight decrease of 1.2 percentage points from 67.1% in Q2, but it remains at a high level compared to those of other new energy mobility products such as electric cars. This attests to EHang’s competitive strength and first-mover advantages in the global UAM and invite industries. In Q3, our adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, were $59.7 million, representing an improvement of 5.9% from 63.4 million in Q2.

The decrease was mainly attributed to a decreased professional expenses as well as fluctuated R&D expenses related to different processes in product development and the ongoing certification process. With that in Q3, our adjusted operating loss was 52.9 million compared with $51.2 million in Q2. Our adjusted net loss was 55.1 million in Q3 compared with 60.8 million in Q2. As for our balance sheet, we continue to maintain relatively healthy cash, cash equivalents, restricted cash and short-term investment balances of 208.8 million as of the end of Q3, which was attributed to our continuous management of operating expenditures and cash flow.

Additionally, we will be moving to a new headquarter office in Guangzhou to embrace the new phase of growth that the company is expecting to see following completion of the type certification. Nevertheless, we have been sticking to a proven cost control strategy and taking effective measures to optimize new office rental expenses. It is expected to give us a cost down estimated by around 20% compared with those of our current office. Given the latest content resurgence in China, we expect such headwinds would probably remain a challenge in the near term. But we believe that for the longer term, we will be able to capture the great growth potential of the UAM industry with a leading technologies and comprehensive strategies. We remain committed to providing a safe autonomous and sustainable area mobility experience while creating value for our shareholders and stakeholders. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

(inaudible) Question-and-session. (Operator Instructions). The first question comes from (technical difficulty).

I have two questions. My first question is regarding the progress of type certification. As we enter into more in debt rating base, can we expand that EHang still can receive types of certificates by the end of this year? And my second question is that in light of recent (inaudible) have we encountered any hiccups in terms of production, component sourcing, types of date obtainment and delivery schedules. And do we see any risk on limiting the timetable of residing on cases. And how should we think about the revenue cadence into 2023. Thank you.

(inaudible) on mutual local line, please. Ladies and gentlemen, please (technical difficulty). Thank you.

Thank you for the answer. May we have the management translation, please? Perhaps management for the translation line, would you like to rejoin again if you can see us. Everyone, please stand by. We are trying to address the issue. We can hear you now. Please carry on, please.

[Interpreted] As our CEO, Mr. Huazhi mentioned earlier, we have to have the type certification has been entered into the final phase, specifically to complete the compliance demonstration and verification work according to the certification plan approved by the CAAC expertise. The practical data that EHang has generated over the past years provides a solid support. And together with the support of the CAAC and the expert team, it will help to accelerate the final phase of the process. As we are the world first, we are facing a lot of uncertainties. But the EH116 certification is one of the key projects on CAAC for this year, which was originally scheduled to complete by Roundup December this year.

Particularly, the CAAC case for the members of the PC expert team to get together at EHang site in Guangzhou to work closely with us. However, the recent epidemic resurgence in Guangzhou made it difficult for all the members across the country to come together. Thus the timetable might be delayed, but it will not be too long because most recently, as the COVID restriction measures have begun to ease that steps in China, the related impact is expected to gradually decrease. So our expectation may be around January next year. This is all about the translation of the first questions.

Thank you. Would you like to move to the next question from the investor, please?

[Interpreted] This is the English translation of the answers above. Regarding your second question, the epidemic has had a significant impact on our business development and the original project depends since the beginning of this year, just like other Chinese companies. In terms of the business development, the tourism industry is our initial main target market for our AAV product applications. While it is one of the industries severely affected by the epidemic. However, we have been exploring more potential opportunities in Guigang City in Guangxi Province, Zhuzhou City in Hunan province, Qingdao City in Shandong province and Anhui city – in Huangshan in Anhui province, et cetera.

And despite the strict pandemic on for measures, and we received adequate trust, support and cooperation from local government and customers. In addition, the epidemic has no significant impact of product on our production and supply chain. And our last year's revenue expectations were depending on the timing of obtaining type certificate and the recovery of the economy and the tourism industry after the epidemic situation gradually subsides in China. And ideally, the potential customers in the market above will be able to place orders while we could gradually deliver the product so that we are likely to achieve significant revenue growth next year and return to the high growth trajectory. And for more details, please wait for our guidance next year. And this is all about the translation of the answer.

Thank you very much for the questions. Allow me to proceed with the next question. One moment, please. Our next question comes from Yiwu Chen from Goldman Sachs. Please proceed.

[Interpreted] I will translate for myself. Thanks, management for taking my question and congratulations on the results. I have two questions. The first one is about the EHang 216 bond. Could you please share us this aircraft to the bond cost breakdown, especially the battery, the motor, the battery management part and who the up -- can we take the view that this EHang model bond cost breakdown is similar as the AAV? And second one is how many the preorder and the deliveries we have so far. And in terms of scenarios, apart from the setting, what types of the passenger transportation meters are we penetrating into? Thanks.

Let me take your first question and then I will let our COO Xin take your second question. So basically, the cost structure of the EH216 AAV can be divided into three major portions. First, the power and propulsion system; and second, the fuselage structure. Third, the electronic components and others. And from a new energy mobility product perspective, the major composition of the propulsion system of EH216 AAV can be regarded similar to that of AAV. Basically, it mainly includes electric motors. Motor drivers and batteries together with the battery management system for BMS.

In respect of percentage each portion, as mentioned just now, consists roughly 1/3 of the total cost more or less. In respect of suppliers, most of our qualified suppliers with long-term relationships, are those located in South China, more specifically in the per river delta area, which is known as a world-leading manufacturing hub and where our headquarter is. So, this gives us an easy access to a large number of high-quality suppliers and the competitive edge in respect supply chain in terms of cost and efficiency as compared to our peer companies in other countries. So I will let Xin take your second question.

[Interpreted] This is the translation of Mr. Fangs answer. So far this year, in addition to the over 200 units of EHang AAV preorders in the Asian markets, we have potential orders from many domestic customers in pipeline, such as (inaudible) Guangxi Province and (inaudible) Zhuzhou city Hunan province. They are very interested in deploying EHang AAV in the local areas to develop the low altitude tourism industry. And the potential orders in (inaudible) included 60 unit of EHang 216 AAV, which are expected to be placed and delivered gradually after obtaining type certificate.

In addition, five units of EHang 216 has been delivered to (inaudible) to developing an erotic project. And this customer intends to purchase additional 25 units as the project evolves. And apart from the low altitude tourism market, we are also in contact with the customers who have needs for firefighting and emergency transportation such as the (inaudible) fire department and some hospitals, which has a potential order about six units of EHang 216 fire-fighting model.

Given that our initial primary target market is the low LTU tourism, which we invest more resources. The revenues from this market will be the most significant in the near future and followed by the firefighting and emergency aero transport use cases. This is the fall of the translation.

Thank you for the answers. One moment for the next question. The next question comes from the line (inaudible) from Tim on Securities.

My first question is, recently, we see that U.S. has issued a series of export bands on high-interest -- ust wondering will there be any potential impact on EHang’s supply chain? And my second question is we noticed that China's domestic epidemic prevention policy is experiencing some softening, especially in Guangzhou. If these policy continue to ease in the future, what will be our new outlook on the future, for example, TC approval and market demand and et cetera. Thank you so much.

This is Richard. Let me take your questions. First of all, we are not using those U.S. band chips in our product that as you can imagine, there will be no potential impact on our supply chain. But we will be mindful of this when we further implement our R&D and supply chain strategies. Additionally, we adopt with stretched to review and ensure quality and stability of our supply chain. And we always seek to fully engage with our qualified suppliers to establish long-standing and strong partnerships.

In respect to your second question, yes, we have been experiencing the optimization or even the easing of COVID prevention and control measures recently. As you mentioned, Guangzhou, where we are headquartered, has initiated doing so since just two days ago. And it seems more cities are gradually following the suit. So, this is a very good sign to the market, given the COVID prevention measures can be further loosened up, travel can be back to normal. So when these challenges are east or is further eliminated, it is expected to have a positive impact on the business.

For example, in respect of type certification, the inspectors will be able to travel without difficulties to our locations to convene and check on-site thus facilitating the process. In respect of markets, you will help the tourism industry, which we initially target back to normal, thus facilitating the relevant tourism operating customers to complete orders. So coupled with TC soon to be obtained, it is expected our business would rebound next year. And we believe our efforts will allow us to capture this market growth opportunities going forward. Thank you.

Thank you for the questions. Seeing no more questions in the queue. Let me turn the call back to Ms. Ji for closing remarks.

Thank you, operator, and thank you all for participating in our today's call. If you have further questions, please contact our IR team by e-mail, who participate in our following investor events through the calendar information provided on our IR website. We appreciate your interest and look forward to our next earnings call. Thank you.

Thank you all again. This concludes the call. You may now disconnect.